Taking Knife to Medicare Means Someone Must Bleed: BGOV Insight

Buttons promoting Medicare for all ages are seen during three days of free health screenings in the Los Angeles area, which are part of the Medicare for All tour in California. Photographer: David McNew/Getty Images

Sept. 6 (Bloomberg) -- If Democrats and Republicans ever
agree to a “grand bargain” of tax increases and entitlement
cuts, get ready for the next debate: Which parts of the
country’s $2.8 trillion health-care industry should feel the
most pain?

There are four basic ways for lawmakers to make that
choice. Whatever approach they take will have a profound impact
on the businesses that make up the health-care industry --
hospitals, physicians, drugmakers, nursing homes and others.
Some approaches may hurt some sectors more than others; more
important, however, is which policy minimizes the pain on the
industry as a whole.

One option is simply to cut Medicare and Medicaid
proportionately across all health-care sectors. Under this
approach, similar to the dreaded “sequestration” currently set
to occur in January on defense and domestic discretionary
programs, each industry sector would take the same hit, whether
it’s 5 percent, 25 percent or some other magic number.

A second option is to pick winners and losers -- paring
more from sectors that are the least popular, and somewhat less
from those with more pull among voters, donors or lawmakers. The
public’s attitudes may have guided the reductions in Obama’s
2013 budget, which proposed $156 billion in cuts to drugmakers
over 10 years, three times the cutbacks for hospitals, and it
largely spared doctors.

A third option is to let someone else decide -- whether the
market, the states, or outside experts. Paul Ryan, House Budget
chairman and Mitt Romney’s running mate, proposes transforming
Medicare into vouchers, which beneficiaries would use to
subsidize the cost of private insurance. Ryan’s proposal would
also turn Medicaid into block grants, which states could spend
as they like. The value of both the vouchers and the block
grants would grow more slowly than under current projections.

Obama’s 2010 health-care law contained a provision with a
similar outcome. It created a body, the Independent Payment
Advisory Board, to decide on Medicare cuts if spending rises
beyond a specified amount starting in 2015. Under vouchers,
block grants, and the advisory board, how reductions would be
apportioned would largely be out of the hands of Congress or
federal agencies.

So the first three options come down to a using blunt
instrument, relying on political influence, or passing the buck
either to the market, the states or the experts.

Each approach has its own gravitational pull. All ignore a
vital part of the debate: the relative financial impact on the
business sectors involved. The degree to which different sectors
of the health-care industry depend on federal financing varies
widely, which means that some sectors would be hurt more than
others if the cuts are applied equally.

In 2013, an estimated 83 percent of home health-care
spending will come from Medicare and Medicaid, as will 55
percent of spending on nursing care. Meanwhile, doctors will get
less than a third of their revenue from the programs next year,
and drugmakers only a fraction more. Hospitals fall in the
middle of the range, getting half of their funding from the two
programs.

That disparity in exposure suggests there ought to be a
fourth option for spreading the pain of entitlement austerity:
apportioning cuts to Medicare and Medicaid based on the ability
of health-care sectors to absorb them. Under this approach, the
government would reduce spending more aggressively for sectors
least reliant on those programs, such as doctors and
pharmaceutical companies, while sparing others the full brunt of
the pain.

To be sure, relative exposure isn’t the only thing to
consider. Some funding formulas are more generous than others,
and those differences should inform any reasonable package of
cuts. Meanwhile, it’s naïve to imagine that either party would
entirely ignore the political calculus of whom to cut and by how
much.

And there’s this to keep in mind: If health-care sectors
with little reliance on Medicare or Medicaid are cut too deeply,
companies may decide to stop working with the programs
altogether -- hurting the patients who rely on those services.

The U.S. health-care industry constitutes 18 percent of the
U.S. gross domestic product and employs more than 14 million
people. While the government has an obligation to maintain a
responsible fiscal policy that doesn’t put the entire economy at
risk, it can accomplish that in a way that considers the impact
on the industry’s constituent parts.

Some health-care sectors have come to depend on federal
spending more than others. Recognizing that fact will help
ensure that future cuts will cause the least havoc in the
nation’s health-care delivery system.

(Christopher Flavelle is a health-care analyst with
Bloomberg Government. The views expressed are his own.)